Asbury Auto Cruising Along With Industry Rebound

Dealership chain Asbury Automotive Group (ABG) emerged from the tumultuous aftermath of the last recession as a growth engine, thanks to proven leadership and a diverse offering of vehicles and services that helped it capitalize on a broader auto industry turnaround.

Under the stewardship of President and CEO Craig Monaghan, who joined the Duluth, Ga.-based firm as CFO in 2008 and nabbed the top job in 2011, Asbury Automotive has built up profits alongside an auto industry that has rebounded since 2010. That's repaired and bolstered a stock that was badly bruised during the financial crisis.

Within months of Monaghan joining Asbury Automotive, the company's stock nose-dived from above $12 per share to the $2 level.

But as the economy healed, pent-up demand for new vehicles was unleashed by 2010, helping to drive auto sales and feed other Asbury Automotive business lines such as its parts and service operation. The company simultaneously trimmed costs and improved its efficiency.

Financial results have since steadily improved.

For the first quarter of this year, the company reported operating income of 77 cents per diluted share, well ahead of the 54 cents a share for the same period a year earlier. It posted 2012 full-year operating income of $2.64 per diluted share, up from $1.77 a share in 2011.

Its stock price now hovers comfortably above 44.

And, analysts say, conditions are ripening for further advances. Demand is widely expected to remain strong the rest of this year and into the next, said Stephens analyst Richard Nelson. He noted the average age of U.S. cars and trucks is about 11 years, the oldest on record. As unemployment comes down and housing values increase amid a growing economy, consumer wealth is rebuilding and confidence is improving. As that develops, he said, more Americans are likely to sell their older vehicles and buy new ones.

Asbury Automotive "will benefit from the continued recovery," Nelson said.

What's more, with interest rates still low, credit is widely affordable. At the same time, trade-in values for used vehicles are generally high, making new car and truck purchases increasingly appealing, Nelson said.

He and other analysts say Asbury Automotive is among a group of established retailers that are both large enough and diverse enough to reach a broad auto-buying audience, making Asbury well-positioned to continue to benefit from the positive momentum. Asbury Automotive operates 77 retail auto stores in 10 major markets, primarily in the South. It has 98 franchises that sell 29 different automotive brands.

Dealership chain Asbury Automotive Group (ABG) emerged from the tumultuous aftermath of the last recession as a growth engine, thanks to proven leadership and a diverse offering of vehicles and services that helped it capitalize on a broader auto industry turnaround.

Under the stewardship of President and CEO Craig Monaghan, who joined the Duluth, Ga.-based firm as CFO in 2008 and nabbed the top job in 2011, Asbury Automotive has built up profits alongside an auto industry that has rebounded since 2010. That's repaired and bolstered a stock that was badly bruised during the financial crisis.

Within months of Monaghan joining Asbury Automotive, the company's stock nose-dived from above $12 per share to the $2 level.

But as the economy healed, pent-up demand for new vehicles was unleashed by 2010, helping to drive auto sales and feed other Asbury Automotive business lines such as its parts and service operation. The company simultaneously trimmed costs and improved its efficiency.

Financial results have since steadily improved.

For the first quarter of this year, the company reported operating income of 77 cents per diluted share, well ahead of the 54 cents a share for the same period a year earlier. It posted 2012 full-year operating income of $2.64 per diluted share, up from $1.77 a share in 2011.

Its stock price now hovers comfortably above 44.

And, analysts say, conditions are ripening for further advances. Demand is widely expected to remain strong the rest of this year and into the next, said Stephens analyst Richard Nelson. He noted the average age of U.S. cars and trucks is about 11 years, the oldest on record. As unemployment comes down and housing values increase amid a growing economy, consumer wealth is rebuilding and confidence is improving. As that develops, he said, more Americans are likely to sell their older vehicles and buy new ones.

Asbury Automotive "will benefit from the continued recovery," Nelson said.

What's more, with interest rates still low, credit is widely affordable. At the same time, trade-in values for used vehicles are generally high, making new car and truck purchases increasingly appealing, Nelson said.

He and other analysts say Asbury Automotive is among a group of established retailers that are both large enough and diverse enough to reach a broad auto-buying audience, making Asbury well-positioned to continue to benefit from the positive momentum. Asbury Automotive operates 77 retail auto stores in 10 major markets, primarily in the South. It has 98 franchises that sell 29 different automotive brands.

"It has a very attractive brand mix," Nelson said.

Auto sales also have been driven by popular new designs, better technology and an expansion of fuel-efficient offerings, said David Whiston, a Morningstar analyst. "There's a lot of fantastic product out there," he said, noting that this benefits a diverse retailer like Asbury.

Whiston said June auto sales were particularly strong. U.S. auto makers sold 1.4 million cars and light trucks last month, up 9.2% from a year earlier, according to Autodata Corp. During the first six months of this year, Americans bought more than 7.8 million cars and light trucks, a 7.7% increase from the same period in 2012.

Prior to the June sales report, Whiston had estimated that the industry's sales could grow 7% to 8% this year, to between 15.2 million and 15.5 million cars and light trucks. But if the strong June numbers are an indication of what lies ahead in coming months, he said, total sales could approach 16 million.

"The June results were very encouraging," he said.

Whiston said increasing new-vehicle sales serve "as a foundation for all of the dealerships' operations" and boost Asbury Automotive in several ways.

In the first quarter, for example, as total revenues increased 15% from a year earlier to $1.2 billion, new-vehicle revenues were up 16%. But its finance and insurance revenues were up even more — 25% — as customers buying cars also tapped the retailer for additional services.

Total gross profit grew 12%, meanwhile, with increases from all business lines, including a 9% bump to gross profit in its parts and service operation. Because of warrantees on new autos, customers tend to stick with dealers for basic services, and because of this, parts and service revenue is a big driver of income for the likes of Asbury Automotive. In fact, it accounts for nearly half of the company's gross profit, Whiston said.

Asbury Automotive is scheduled to report second-quarter results July 23. Analysts on average estimate earnings of 81 cents per share, up 17% from a year earlier, according to Thomson Reuters.

Whiston also noted that management has previously told analysts that Asbury could pursue acquisition opportunities this year to further expand its reach. And, importantly, Monaghan has impressed the Street, he said.

The chief executive joined Asbury Automotive from AutoNation (AN), the largest U.S. automotive retailer, where he was finance chief. Whiston said AutoNation has a reputation for operating efficiently and taking advantage of economies of scale. He said Monaghan has injected a heightened focus on those aspects to Asbury Automotive "and is still transforming the company." He anticipates that Asbury Automotive will continue to get leaner and, in the process, churn out healthy profits the rest of this year.

Under Monaghan, for instance, the company has bought out many of its stores' lease agreements, recognizing that with low interest rates it would save in some cases by paying less in mortgage payments. It completed $18 million in lease buyouts in 2012. It also divested a pair of underperforming franchises while acquiring two others viewed as growth opportunities.

Uncertain Road Ahead

All of that said, Asbury Automotive and its top competitors are hardly immune to outside pressures, analysts say. The economy, while recovering, could sputter again and curb sales. Or interest rates could rise rapidly if the Federal Reserve backs off on stimulus efforts that have put downward pressure on rates, potentially affecting consumers' access to affordable credit. Or unexpected disruptions to supplies could affect retailers' ability to meet demand.

And competition is always fierce — from major competitors such as AutoNation to myriad smaller players scrapping to survive.

Investors at some point could bet against a continued sales rise, Whiston said. They could sell off auto retailer stocks, "take profits and move on to another sector."

But right now, he said, "things are looking good."

For his part, Monaghan has conveyed nothing but confidence to investors. Speaking with analysts during a conference call to discuss first-quarter results, the executive said the company's new-vehicle sales outperformed the industry as a whole and the positive momentum is sustainable.

"We believe our strong brand portfolio, attractive geographic locations and proven ability to execute will allow us to grow across all business lines," he said.

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